Euro-ruling on music mail-order VAT loophole could come this autumn

The latest issue of entertainment retail publication Cue Magazine includes an in-depth article on the much previously reported Channel Islands VAT loophole which enables the likes of Amazon, HMV, Play.com and The Hut to sell CDs via mail-order without paying any sales tax, meaning they can easily undercut any mainland retailer which has to add a 17.5% (20% from January) tax onto its products.

As much previously reported, companies selling goods that cost £18 or less from a Channel Islands base to customers in the UK do not have to pay VAT on the sale. The loophole exists because of the Channel Islands’ quirky status, outside the UK and European Union, but under the British crown and within the European Community customs zone.

The loophole has been particularly utilised by mail-order enterprises which sell products that usually retail below £18, and especially the mail-order CD business. Most of the bigger online CD sellers base their actual mail-order operations on Jersey or Guernsey (or, more often these days, outsource the fulfilment to another company based there), which means they don’t have to charge VAT on CDs sold.

CDs get shipped over to the islands in bulk from the UK, and are then mailed back to the mainland one by one. The extra logistical costs doing that causes are more than compensated for by the competitive advantage not having to pay VAT gives those retailers who use the loophole.

Some argue this VAT loophole has played a part in the well documented demise of the independent music retail sector in the UK, because independent record stores couldn’t take advantage of the opportunities the internet offered for them to expand their mail-order operations, because they could never compete on price with the bigger players.

When indie retailers started to complain about the loophole, both the UK and Jersey governments called for something to be done, though neither did so. Labour Finance Minister Stephen Timms then formally denied that the Play.coms and HMVs of this world were putting their mail-order operations on the Channel Islands simply to benefit from the loophole, seemingly under the impression they went their for the fresh air.

But the Cue article includes quotes from both The Hut Group’s founder and an HMV annual report that admit they base their respective operations on the Channel Islands because of the benefits of the VAT relief. Meanwhile, another unnamed offshore retailer argues that – while the VAT loophole is clearly why so many big mail-order ventures are based in the Channel Islands – because all the big players now benefit from the same tax dodge, there aren’t any anti-competition issues. Which, of course, ignores the indies and the tax income lost to the UK.

As previously reported, a complaint has been made to the European Union’s tax commissioner about the loophole in a bid to force the UK government to act. Although that commissioner wouldn’t comment on the complaint or the timescales of his office’s consideration of it, he hinted to Cue that a decision could be made within the year.

If it were to rule in the complainant’s favour, says Richard Murphy of Tax Research UK: “This could have a fundamental impact on those companies whose retail base is heavily dependant on offshore activities. [The tax relief] is the only reason goods are shipped through the Channel Island. These companies would vanish [from the Channel Islands] if VAT relief was ended”.